Pension increase to cover SNP tax rise

davieg11

If SNP put up income tax in Scotland by say 2%, can anyone calculate what extra percentage would you have to increase you pension contributions, with salary sacrifice, on an average wage of £28k, to keep your gross tax payments the same.

Malthusian

If it's salary sacrifice then nothing. Your gross pension contributions come out before tax is applied, and will remain the same.

The difference is that if you cancelled the salary sacrifice you would get a smaller net amount than you would have before the tax increase.

If you were making pension contributions out of post-tax money then you would reduce your net contributions by 2.5%. E.g. if you were paying £800 net, £1,000 gross before, you would instead pay £780 net for £1,000 gross, which is a 2.5% decrease.

However this would be a daft thing to do because you have to assume that when you retire you will pay more tax when you take money out of the pension. So, ignoring tax free cash and all that jazz, you will need a bigger gross pension fund to give you the same net income in retirement. So you keep your net contribution the same, for an increased gross contribution.

Your pension contributions should be based on how much income you will need in retirement and how much you can afford to save. The latter has not changed. The former has gone up, because you will need a larger gross income to compensate for the higher tax that will be taken off. So you keep the net contribution the same and allow the gross contribution to go up.

davieg11

If I'm right then £28k salary minus £11.5k tax free = 16.5k x 20% tax = £3300 tax paid.
So if I put £1500 into pension then £28k minus £1.5k minus £11.5k = £15k x 22% tax = £3300 tax paid.
That works out that I would have to add an extra 6% pension contributions from salary (28k x 6% = £1680) to bring my salary down to £26320 - £11500 = £14820 x22% = £3260 tax paid so I am not paying more tax. Is this right? Or I suppose I could move to England!

sammyjammy

Or stop worrying about something that'll probably never happen! If it does you'll have plenty of time to increase your pension contributions.

Dazed_and_confused

They have already increased tax in the current tax year for anyone with income over £43k